Fiserv: No Longer Undervalued; Greater Growth Opportunities Exist Within Peers

Fiserv (NYSE:FI), not Pfizer or Fiverr, is one of the largest fintech in the world with $94 billion in market cap, $19 billion in annual revenues, and $3 billion in net income. The stock has a multidecade history of outperforming the S&P 500, and over the last 6 months, has accumulated an extraordinary total return of 40.8%. They operate in 100 countries, even though 85% of the total revenue comes from the US market. Merchant Acceptance, Financial Technology, and Payments & Network are the segments in which they comprise a long-standing fintech conglomerate.

In this analysis, I will go through their M&A activity, revenue mix, valuation against peers, performance against the broad market, and illustrate where the stock is currently trading vs. price targets, to finally arrive to the conclusion of a hold rating.

The Fintech Super Shopper

Fiserv had its IPO in 1984, and ever since that day, the company has been able to grow its revenues at a CAGR of 18.6%. Over 39 years, the revenue has expanded by 770x times, passing from $24.8 million in annual revenues vs. the $19 billion, they record now. As traditional banks began to digitalize decades ago, Fiserv has been in the right position to offer a wide range of technological B2B services to these financial institutions.

Fiserv’s multi-decade growth has come both organically and via an aggressive M&A strategy. Since 1992, and up till today, the company (or its subsidiaries) have acted as a buyer in 120 occasions, totaling $39.768 billion in transaction value. The previous data is an aggregate from the 43 transactions that disclosed the deal value. Therefore, the total transaction value is significantly higher.

The latest acquisition was made in October of 2023 to buy Skytef Solutions for an undisclosed amount. Skytef is now part of Fiserv, but it was a Brazilian company that offered POS machines and led the EFT solutions in that country. It is worth mentioning that US competitors such as PayPal with Zettle, ceased operations in that country about a year ago.

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Source: Author’s compilations | Data: FactSet

Above is a table with the biggest acquisitions in the company’s history. Notably, First Data appears first, which was an acquisition made for $21.5 billion that offered a 29% premium against the previous 5-day’s volume weighted stock price. The move allowed Fiserv to expand their portfolio offering and enter the SMB POS ecosystem, with a strong provider with a larger market share such as Clover.

As you might have imagined, this is a company that has a substantial amount of goodwill that arose from subsequent acquisitions made through the years and that remained on the balance sheet. As of Q4 2023, goodwill constituted 41% of the total assets of Fiserv. For context, within big M&A players such as Microsoft (MSFT) and Alphabet (GOOG), the goodwill portion of total assets represents 25% and 7%, respectively.

Following the multi-decade growth momentum, the stock has vastly outperformed the returns of the S&P 500. It’s hard to dimension or even spell the difference, so above is a graph that illustrates the discrepancy.

Revenue Streams

Even after the record-breaking acquisition of First Data in 2019, which included Clover, the Merchant Acceptance segment is what has been driving the revenue growth of the company for the past years. Up till today, the acceptance business constitutes 46% of the company and has had a compounded growth rate of 7.9% during the last three years, measured with quarterly data. Additionally, the payments business has slightly decreased its share after the acquisition, and it’s now 37% of Fiserv. Last, the Fintech business didn’t grow by much and seems to be a value play for the company growing by a modest 1.6%.

Valuation

Finding a perfect comparable company for Fiserv is a challenge. There is no other company with that market cap that operates in the Acceptance, Payments, and Fintech businesses, as Fiserv does. Therefore, what made more sense to me was to find comparable companies in both the highest growing and current largest segment of Fiserv. In this case, it was the Merchant Acceptance, as it’s the largest segment and has the fastest revenue growth. The largest competitors within that segment were PayPal (PYPL), Block (SQ), and Adyen (OTCPK:ADYEY), so those were the ones selected for this exercise.

If this were boxing, Adyen would win the Seeking Alpha Quant ratings by a unanimous decision. For Adyen, every segment other than valuation is green and A, and after looking at their PEG ratio compared to peers, the grade should not have been an F; it should probably have been a Z. But anyway, for the most important ratings (growth and profitability), Fiserv looks good on an absolute basis but not very outstanding compared to peers on a relative one. So, let’s dive into them one by one.

Before I start analyzing the growth, let me remind you that Fiserv not only operates in the Merchant Acceptance segment. They are also running other segments such as Fintech that has been exhibiting slow growth and that of course affects the growth when pondering. In addition, competitors such as Block and PayPal are not pure merchant acceptance players and also have bank components within their revenues. Therefore, this isn’t a 100% apples-to-apples comparison, but I believe it is still a valid comparison.

Growth

Great! now analyzing growth compared to peers, Fiserv experienced the lowest top-line growth in the last three years, and it’s expected to remain lower next year at 8.1% compared to Adyen that expects to grow revenue at a rate of 23.8%. Nonetheless, the acceptance segment (which includes Clover and Carat) grew organic revenues in 2023 at 24%, which aligns closer to Block and Adyen’s historical growth rate.

In terms of EBITDA growth, Block appears to have nailed the 3-year CAGR at 57.4%, but it’s quite misleading as in FY 2022 they had their most negative EBITDA ever. Other than that, Fiserv didn’t show outstanding numbers compared to peers.

Last, with regards to EPS, a different thing has held true, and Fiserv has been the fastest-growing company in this bottom-line respect. Nonetheless, forward EPS is expected to significantly lower as compared to Block and Adyen, for example.

Profitability

On an absolute basis, Fiserv’s profitability margins look fantastic. Gross, EBITDA, and net income margins fall at 59.8%, 41.7%, and 16.1%, respectively. All are great and demonstrating quality within the income statement. Still, on a relative basis, Fiserv’s margins look more appealing than PayPal and Block. Nonetheless, the big winner again, is Adyen, with even better margins.

Diving into the return metrics, Fiserv’s metrics aren’t a big deal for their sub-industry. On a relative basis, it underperforms peers such as PayPal and Adyen. Something worth mentioning is that as Fiserv becomes more diversified, it would be harder for ratios such as return on equity to increase as lower-growing segments distort the ratio to the downside. The aforementioned is the case that Citi Group has been experiencing for decades and has been active in divesting from their not as profitable business lines, to simplify their business model.

Stock Movements

Since the market drop of 2022, many Covid related winners got smashed, particularly merchant acceptance services such as PayPal and Square that got gigantic dropdowns. In the case of PayPal, for example, the stock needs to move up 512.3% to recover from an 83.7% dropdown. For Fiserv, this wasn’t the case, and since July of 2023, the stock has traded at all-time highs. Even though the segment that runs Clover and Carat (acceptance) is the largest, the stock didn’t experience major drops as the aforementioned peers. In contrast, it moved in line with peers of its payment network segment such as Visa and Mastercard, which are competitors in the routing of debit transactions.

Going through the three-year look-back period, Fiserv has heavily outperformed its merchant acceptance peers. If you invested $1,000 three years ago in Fiserv and each of the peers, you would have the following returns (including dividends).

• $1,293 – Fiserv
• $754 – Adyen
• $396 – Block’s
• $278 – PayPal

Quite a difference, right?

That is one of the advantages of being invested at a company that has natural diversification (within fintech) and offers services across almost all the fintech spectrum. Yes, by doing this, a conglomerate discount will start to apply in the valuation, but this makes the stock less volatile and less sensitive to experience huge sub-industry specific drawdowns.

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Source: Author’s compilations | Data: Seeking Alpha

Obviously, Fiserv hasn’t been the outperformer in the last 6 months as market sentiment soars, especially since companies such as Square and Adyen are experiencing huge rebounds from previous downturns. Nonetheless, Fiserv’s 6-month total return of 40% has still been attractive, outperforming the general market by a considerable margin of 18.6%. On the other hand, PayPal’s stock movements don’t look good over any holding period, not even since the IPO lookback period. To not leave you intrigued, I plan to conduct an analysis of PayPal soon. I will analyze whether it’s a value trap, it’s priced fairly, or if it’s currently experiencing a high margin of safety.

Fiserv’s Target vs. Market Pricing

Out of the 39 sell-side analysts who have covered Fiserv’s stock, the average agrees on a $160 price target. Over the months this target has been hit as the stock has risen by more than 40% during that period. That would suggest that the company is fairly valued based on analyst expectations and would more likely be inclined to receive a hold rating.

Macro Plays

When a company has a big chunk of the market share, the macro changes become more significant and capable of identifying sources of financial returns. Payments and Acceptance are two components of Fiserv that heavily depend on real consumption expenditure, which represents around two-thirds of the US GDP. As seen in the graph above, in February, the growth accelerated YoY, and overall, 2023 was a year of stronger growth in terms of real consumption. In economic theory, lower interest rates would boost consumption. Nonetheless, this highly depends on how unemployment, income level, and consumer confidence play along a dovish fed. So, I won’t draw a conclusion here, as looking at one single variable is an incomplete assessment that suffers from a framing bias.

Conclusion

To wrap up, Fiserv is a great business that has outperformed the market for decades and that has had a phenomenal growth year over year, for almost 40 years. Their acquisition of First Data is the gasoline that keeps powering the engine in terms of growth, and in my opinion, it was a right play. Nonetheless, other segments like the Fintech have been encountering little growth and I see it as more of a value play in the revenue mix. In terms of growth vs. peers, the diversified conglomerate status would most likely make them underperform in terms of total revenue growth compared to peers such as Adyen. Nonetheless, their conglomerate diversification is probably one of the reasons why they didn’t suffer much from the bear market of 2022, as compared to Block or PayPal.

For me, this company is a hold. I believe the stock has risen significantly since October and seems fairly priced compared to analyst price targets. If there was a higher margin of safety, I would give it a buy, but it doesn’t have the smartest entry point right now. Another aspect is that in bull markets, peers with higher betas are more likely to outperform, as has been the case for the last six months with Block and Adyen obtaining significantly more attractive stock returns. Nonetheless, if there is a market correction, because of the value plays of the company, they are better positioned to obtain less downside volatility compared to peers.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.